Our ailing productivity is workers’ payback to the greed of bankers after the 2008 crash

The self-destruct mission led by the SNP has helped the Labour party to be seen as firm favourites to win the next election, quite a turn around from their 2019 fate. But were he in government, he would be grappling with exactly the same issue Rishi Sunak is now. Namely, how to raise the rate of growth of productivity in the UK. 

Productivity is what will drive economic growth and pull living standards back up. And it is economic growth which delivers the resources to pay for whatever goodies a political party chooses to serve up to the electorate.

Rachel Reeves, the Shadow Chancellor, has so far acted with commendable restraint by keeping spending commitments under tight check. Taxation is already very high so the scope for generating extra revenue by further increases is limited. Raising productivity, and through this the size of the economy, remains the key.  

But since the 2008 financial crisis, growth in both productivity and the economy as a whole has slowed dramatically across the West. In the pre-pandemic decade 2010-19, growth in every economy has been less than its long-term average over the previous 150 years. There is no sure consensus as to why. 

The one thing which is absolutely clear is that the reduction in GDP and productivity growth dates from the late 2000s, coinciding with the timing of the financial crisis. It is harder to show how exactly it was caused.

But there was at the time a huge amount of resentment about the way in which the banks and, perhaps more precisely, the bankers themselves were bailed out. The ill-feeling still resonates to this day.

Much of the activity of those involved in financial markets in the run up to the crisis can be readily classified under the heading of what economists call “rent seeking”. 

The word “rent” here does not mean what you pay on your apartment to live in it. The concept goes all the way back to Adam Smith, though the phrase was only coined in the late 20th century. Rent seeking means trying to increase your share of existing wealth without creating any new wealth.

The creation of exotic financial instruments, such as derivatives, which Warren Buffett once called ‘financial weapons of mass destruction’, seems to fit the bill. It is hard to produce firm evidence, but it is entirely possible that many workers elsewhere in the economy watched and learned from this.

It was not just bankers who seemed to be at it. In America the typical compensation of the CEO of a large company is now at least 300 times more than that of the average worker. In the 1970s the ratio was only 30 to 1. Yet the performance of the economy hardly seemed to warrant such a dramatic widening of outcomes.

A reasonable message to take away from this is that you might try a bit of rent seeking of your own. Why bother to work quite as hard when your supposed betters were getting away with rent seeking on a massive scale?

The phenomenon of “quiet quitting” has gained traction since the pandemic, the practice of working slowly in a subtle protest against the dissatisfaction of work. But the seeds could easily have been sowed a decade earlier.

Restoring a sense of fairness, not of equality of outcomes but a feeling that the outcomes are fair, might be the key to solving the productivity puzzle. It is something which Rishi Sunak seems to be trying to do, but it is an area in which Labour is currently holding the cards.

As published in City AM Wednesday 12th April 2023
Image: Wallpaper Flare
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